2006 Annual Report - Fiat SpA

charges for risk provisions and write-downs, are reported
in cost of sales.
Research and development costs
This item includes research costs, development costs not
eligible for capitalisation and the amortisation of development
costs recognised as assets in accordance with IAS 38 (see
Notes 4 and 13).
Government grants
Government grants are recognised in the financial statements
when there is reasonable assurance that the Group company
concerned will comply with the conditions for receiving
such grants and that the grants themselves will be received.
Government grants are recognised as income over the periods
necessary to match them with the related costs which they are
intended to compensate.
Taxes
Income taxes include all taxes based upon the taxable profits
of the Group. Taxes on income are recognised in the income
statement except to the extent that they relate to items directly
charged or credited to equity, in which case the related income
tax effect is recognised in equity. Provisions for income taxes
that could arise on the distribution of a subsidiary’s
undistributed profits are only made where there is a current
intention to distribute such profits. Other taxes not based on
income, such as property taxes and capital taxes, are included
in operating expenses. Deferred taxes are provided using the
full liability method. They are calculated on all temporary
differences between the tax base of an asset or liability and the
carrying values in the consolidated financial statements, except
for those arising from non tax-deductible goodwill and for
those related to investments in subsidiaries where their
reversal will not take place in the foreseeable future. Deferred
tax assets relating to the carry-forward of unused tax losses
and tax credits, as well as those arising from temporary
differences, are recognised to the extent that it is probable
that future profits will be available against which they can be
utilised. Current and deferred income tax assets and liabilities
102 Fiat Group Consolidated Financial Statements at December 31, 2006 - Notes
are offset when the income taxes are levied by the same
taxation authority and where there is a legally enforceable
right of offset. Deferred tax assets and liabilities are measured
at the substantively enacted tax rates in the respective
jurisdictions in which the Group operates that are expected
to apply to taxable income in the periods in which temporary
differences will be reversed.
Dividends
Dividends payable are reported as a movement in equity
in the period in which they are approved by stockholders.
Earnings per share
Basic earnings per share are calculated by dividing the Group’s
net profit attributable to the various classes of shares by the
weighted average number of shares outstanding during the
year. For diluted earnings per share, the weighted average
number of shares outstanding is adjusted assuming conversion
of all dilutive potential shares. Group net result is also
adjusted to reflect the net after-tax impact of conversion.
Use of estimates
The preparation of financial statements and related disclosures
that conform to IFRS requires management to make
judgements, estimates and assumptions that affect the
reported amounts of assets and liabilities and the disclosure
of contingent assets and liabilities at the date of the financial
statements. The estimates and associated assumptions are
based on historical experience and other factors that are
considered to be relevant. Actual results could differ from
those estimates. Estimates and assumptions are reviewed
periodically and the effects of any changes are recognised
in the period in which the estimate is revised if the revision
affects only that period, or in the period of the revision and
future periods if the revision affects both current and future
periods.
The following are the critical judgements and the key
assumptions concerning the future, that management has
made in the process of applying the Group accounting policies
and that have the most significant effect on the amounts
recognised in the consolidated financial statements or that
have a significant risk of causing a material adjustment to
the carrying amounts of assets and liabilities within the next
financial year.
Allowance for doubtful accounts
The allowance for doubtful accounts reflects management
estimate of losses inherent in wholesale and retail credit
portfolio. The Group reserves for the expected credit losses
based on past experience with similar receivables, current and
historical past due amounts, dealer termination rates, write-offs
and collections, the careful monitoring of portfolio credit quality
and current and projected economic and market conditions.
Recoverability of non-current assets (including goodwill)
Non-current assets include property, plant and equipment,
investment property, intangible assets (including goodwill),
investments and other financial assets. Management reviews
the carrying value of non-current assets held and used and that
of assets to be disposed of when events and circumstances
warrant such a review. Management performs this review
using estimates of future cash flows from the use or disposal
of the asset and suitable discount rate in order to calculate
present value. If the carrying amount of a non-current asset is
considered impaired, the Group records an impairment charge
for the amount by which the carrying amount of the asset
exceeds its estimated recoverable amount from use or disposal
determined by reference to its most recent corporate plans.
Residual values of assets leased out under operating
lease arrangements or sold with a buy-back
commitment
The Group reports assets rented or leased to customers under
operating leases as tangible assets. Furthermore, new vehicle
“sales” with a buy-back commitment are not recognised as
sales at the time of delivery but are accounted for as operating
leases if it is probable that the vehicle will be bought back. The
Group recognises income from such operating leases over the
term of the lease. Depreciation expense for assets subject to
operating leases is recognised on a straight-line basis over the
term of the lease in amounts necessary to reduce the cost of
the assets to its estimated residual value at the end of the
lease term. The estimated residual value of the leased assets is
calculated at the lease inception date on the basis of published
industry information and historical experience.
Realisation of the residual values is dependent on the Group’s
future ability to market the assets under the then-prevailing
market conditions. The Group continually evaluates whether
events and circumstances have occurred which impact the
estimated residual values of the assets on operating leases.
Sales allowance
At the later time of sale or the time an incentive is announced
to dealers, the Fiat Group records the estimated impact of
sales allowances in the form of dealer and customer incentives
as a reduction of revenue. There may be numerous types of
incentives available at any particular time. The determination
of sales allowances requires management estimates based on
different factors.
Product warranties
The Group makes provisions for estimated expenses related to
product warranties at the time products are sold. Management
establishes these estimates based on historical information on
the nature, frequency and average cost of warranty claims. The
Group seeks to improve vehicle quality and minimise warranty
claims, but it has also extended contractual warranty periods
for certain classes of vehicles.
Pension and other post-retirement benefits
Group companies sponsor pension and other post-retirement
benefits in various countries. In the US, the United Kingdom,
Germany and Italy, the Group has major defined benefit plans.
Management uses several statistical and judgmental factors
that attempt to anticipate future events in calculating the
expense, the liability and the assets related to these plans.
These factors include assumptions about the discount rate,
expected return on plan assets, rate of future compensation
increases and health care cost trend rates. In addition, the
Group’s actuarial consultants also use subjective factors such
as withdrawal and mortality rates in making relevant
estimates.
Realisation of deferred tax assets arising from tax
loss carryforwards
As of December 31, 2006, the Group had gross deferred tax
assets arising from tax loss carryforwards of 5,701 million
Fiat Group Consolidated Financial Statements at December 31, 2006 - Notes 103